Subcontractors’ insurers must provide a complete defense to the developer/general contractor, but can they force others to pitch in?
A recent California decision has subcontractors and their commercial general liability (CGL) insurers crying foul and heading back to the drawing board. In Presley Homes, Inc. v American States Ins. Co., 90 Cal App 4th 571, 108 Cal Rptr 2d 686 (Cal App June 11, 2001), the California Court of Appeal held that a subcontractor’s CGL insurer was obligated to pay all of its additional insured developer’s defense costs in a construction defect suit. This was despite the fact that the additional insured coverage was expressly limited to liability arising out of the named insured subcontractors’ work, but the construction defect suit alleged both liability arising out of those subcontractors’ work and liability not arising out of their work.
Although the subcontractors’ insurer did not have to pay any settlement or judgment on behalf of the additional insured developer, subcontractors having read this decision correctly recognize that the defense costs for a large, complicated construction defect suit can be enormous. Some raise the specter of the doorknob subcontractor’s insurer being forced to bear all of the developer or general contractor’s defense costs for a large, complicated construction defect suit seeking damages that are 99 percent unrelated to doorknobs.
The Presley Case
Presley was the developer for a residential construction project in southern California called Andora. American States insured two of Presley’s subcontractors: Darrell Link Construction and Sunrise Framers. Link was hired to do concrete work, such as foundations, driveways, walkways, and stoops. Sunrise did the framing.
Presley’s subcontracts with Link and Sunrise required each of them to add Presley as an additional insured to its CGL policy. Both policies were endorsed to make Presley an additional insured, and each endorsement provided that its coverage was primary and not diminished by the availability of other insurance.
Link’s policy contained a CG 20 09 endorsement, and Sunrise’s contained a CG 20 10. The difference was immaterial to the case, however, as American States did not deny that it owed a duty to defend Presley in the ensuing construction defect suit brought by a homeowner in Andora.
Each endorsement, of course, limited the coverage for Presley to its liability arising out of the named insured’s work (Link or Sunrise). Although American States admitted that the homeowner’s complaint alleged liability arising out of Link and Sunrise’s work, i.e., it alleged defects in the concrete and framing, American States contended that the complaint also alleged liability not arising out of Link and Sunrise’s work, i.e., not related to the concrete or framing, and therefore not covered by American States. Therefore, American States refused to provide a full funding of Presley’s defense, instead attempting to secure an agreement with Presley for a partial funding, reflecting only those portions of the homeowner’s complaint alleging defects in concrete or framing. When agreement proved elusive, Presley demanded a full defense from American States, which American States refused.
American States then settled the construction defect suit without any contribution from Presley. But Presley had incurred significant costs defending the suit, and filed a declaratory judgment action seeking reimbursement of those costs from American States. The trial judge ruled that American States did not have to fund the entire defense, but the California Court of Appeal reversed.
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by Joseph P. Postel
Liberty Mutual Insurance Group
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